THE PHILIPPINE FINANCIAL SYSTEM

The financial system has a complex structure and operation involving every individual and business
organization in a civilized society. It comprises the financial institutions, banking financial institutions and non-
banking institutions. Thus, the financial system is a network of various institutions which generates, circulates,
and controls money and credit. It serves as a catalyst in the country’s growth and development.

Structure of the Philippine Financial System

Bangko Sentral ng Pilipinas

Banks Non-Banks

Private banking Institution Private non-bank institution

a. Universal banks a. Investment Houses
b. Commercial banks b. Financing Companies
c. Thrift banks c. Investment Companies
1. Savings and Mortgage Banks d. Pawnshops
2. Stock Savings And Loan Association e. Credit Unions
3. Private Development Banks f. Securities Dealer/broker
d. Rural Banks g. NSSLA
e. Cooperative Banks h. Trust Companies
i. Fund Managers
j. Insurance Companies
Government Banking Institution k. Building and Loan Associations
a. Development Bank of the Philippines
b. Land Bank of the Philippines
c. Al-Amanah Islamic Investment Bank of the Philippines
Government Non-Bank
a. GSIS
b. SSS
c. PAG-IBIG

BSP is presented ahead of the banking and non-banking institutions since it is the country’s central
monetary authority. It provides policy direction in the areas of money, credit and banking. It has supervision
over the operations of banks and exercises regulatory powers over the operations of non-bank financial
institutions performing quasi-banking functions.

Elements of the Financial System

1. Financial Claims/Financial Instruments. These comprise the money and the rights to receive
money. There are two broad categories of claims: Debts and Equities.
2. Financial Institutions. Financial Intermediaries which act as middlemen between suppliers and
users of money.
3. Financial Markets. The Heart of the Financial Institutions. These are institutions that expedite
transaction in financial claims.
4. Government Agencies. Laws on money, credit and banking are legislated by the Congress and
through executive orders issued by the President of the Philippines.
5. Laws and Policies. To ensure the desired levels of investment, employment, production, income
and consumption.
THE BANGKO SENTRAL NG PILIPINAS
The BSP is the Philippines’s central bank. It was established on 3 July 1993 pursuant to the provisions of the
1987 Philippine Constitution and the New Central Bank Act of 1993. Its forerunner was the Central Bank of
Philippines (CBP), which was established on 3 January 1949.

History
A group of Filipinos had conceptualized a central bank for the Philippines as early as 1933. It came up
with the rudiments of a bill for the establishment of a central bank for the country after a careful study of
the economic provisions of the Hare-Hawes Cutting bill, the Philippine independence bill approved by the
US Congress.

During the Commonwealth period (1935-1941), the discussion about a Philippine central bank that
would promote price stability and economic growth continued. The country’s monetary system then was
administered by the Department of Finance and the National Treasury.

In 1939, as required by the Tydings-McDuffie Act, the Philippine legislature passed a law establishing
a central bank. As it was a monetary law, it required the approval of the United States president. However,
President Franklin D. Roosevelt disapproved it due to strong opposition from vested interests. A second
law was passed in 1944 during the Japanese occupation, but the arrival of the American liberalization
forces aborted its implementation.

Shortly after President Manuel Roxas assumed office in 1946, he instructed then Finance Secretary
Miguel Cuaderno, Sr. to draw up a charter for a central bank. Immediately, the Central Bank Council, which
was created by President Manuel Roxas to prepare the charter of a proposed monetary authority,
produced a draft. It was submitted to Congress in February1948. The charter of the Central Bank of
Guatemala was chosen as the model of the proposed central bank charter.

By June of the same year, the newly-proclaimed President Elpidio Quirino, who succeeded President
Roxas, affixed his signature on Republic Act No. 265, the Central Bank Act of 1948. The Central Bank of the
Philippines (CBP) was inaugurated and formally opened with Hon. Miguel Cuaderno, Sr. as the first
governor. The broad policy objectives contained in RA No. 265 guided the CBP in the implementation of its
duties and responsibilities, particularly in relation to the promotion of economic development in addition
to the maintenance of internal and external monetary stability. The establishment of the Central Bank of
the Philippines was a definite step toward national sovereignty.

In November 1972, RA No. 265 was amended by Presidential Decree No. 72 to make the CBP more
responsive to changing economic conditions. PD No. 72 emphasized the maintenance of domestic and
international monetary stability as the primary objective of the CBP. Moreover, the CBP’s authority was
expanded to include not only the supervision of the banking system but also the regulation of the entire
financial system. Further amendments were made with the issuance of PD No. 1771 to improve and
strengthen the financial system, among which was the increase in the capitalization of the CBP from P10
million to P10 billion.

The administration that followed the transition government of President Corazon C. Aquino saw the
turning of another chapter in Philippine central banking. In accordance with a provision in the 1987
Constitution, President Fidel V. Ramos signed into law Republic Act No. 7653, the New Central Bank Act, on 14
June 1993. The law provides for the establishment of an independent monetary authority to be known as the
Bangko Sentral ng Pilipinas, with the maintenance of price stability explicitly stated as its primary objective.
This objective was only implied in the old Central Bank charter. The law also gives the Bangko Sentral fiscal and
administrative autonomy which the old Central Bank did not have. On 3 July 1993, the New Central Bank Act
took effect.
 BSP Objectives

The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable
economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the
national currency. Price stability refers to a condition of low and stable inflation. With price stability, prices of
goods do not rise too quickly. Price stability preserves the purchasing power of the Filipino people.

BSP Functions
Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its status as
the Republic’s central monetary authority.

1. Liquidity Management. The BSP formulates and implements monetary policy aimed at influencing
money supply consistent with its primary objective to maintain price stability.

How does the BSP implement monetary policy?

The BSP implements monetary policy using various instruments. To contract or expand liquidity
in the financial system, the BSP can do any or a combination of the following actions:

1. Raising/reducing the BSP's policy interest rates;

2. Increasing/decreasing the reserve requirement;
3. Moral Suasion
4. Raising/reducing the BSP's exchange rate policy
5. Sales/purchases of the BSP’s holdings of government securities.

2. Issuer Philippine banknotes and coins . The BSP has the exclusive power to issue the national
currency. These are used by the public in daily business and commercial transactions. All notes and
coins issued by the BSP are fully guaranteed by the Government and are considered legal tender for all
private and public debts.

3. Lender of last resort/Banker of banks. The BSP provides discounts, loans and advances to
banking institutions in times of emergencies, or if financial problems directly threaten monetary and
financial stability.

4. Supervises all banks. To ensure the prudent management of deposits and other funds from the
public, and the stability of the financial system, banks are subject to close supervision. The BSP
regularly monitors and examines the operations of banks, as well as their compliance with banking
rules and regulations.

5. Custodian of the country’s international reserves. The BSP seeks to maintain sufficient
international reserves (e.g. gold and foreign exchange) to meet the economy’s foreign
exchange/currencies requirements in order to preserve the international stability and convertibility of
the Philippine peso.

6. Determination of exchange rate policy. The BSP determines the exchange rate policy of the
Philippines to ensure more efficient allocation of the resources in the economy.

7. Financial advisor. BSP serves as adviser to the government on matters pertaining to borrowing.

8. Banker and Official Depository of the Government, its political subdivisions and
instrumentalities and government-owned and -controlled corporations (GOCCs).

In addition to its core tasks, the BSP is committed to its various advocacy programs:

1. Financial Literacy 3. Anti-Money Laundering

2. Clean Notes policy and anti-counterfeiting campaigns 4. Coin Recirculation